Dynamic portfolio choice and information trading with recursive utility

Abstract

This paper examines a consumption-portfolio allocation and information trading problem with recursive utility in continuous time when stock returns are unobservable and when investors have to learn about it by using the stock price and the information products they purchase. We derive optimal consumption, portfolio policies, and information trading strategies in a semi-closed-form. Our quantitative analysis shows that ignoring information trading opportunities leads to significant economic losses for investors, particularly in a high-uncertainty case. More importantly, using the recursive utility, we innovatively find that the elasticity of intertemporal substitution (EIS) has a significant impact on an investors’ information trading. In particular, the lower the EIS of the investor, the more information products purchased by the investor. This paper provides an important economic foundation regarding trading information products in the financial market.